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8/10/2019 John Johnson - IP Valuation.ppt
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AIPLA1
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American Intellectual Property Law Association
IP Valuation
John T. Johnson & Michael F. Autuoro
Fish & Richardson P.C.IP Practice in Japan Committee
2014 AIPLA Mid-Winter InstitutePhoenix, AZ
January 28-29, 2014
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Agenda
Intro to IP Valuation
What is it? Why the Increased Need?
Circumstances Requiring Valuation
Intro to Valuation Methods
Quantitative Valuation Techniques
Qualitative Valuation Techniques
IP Valuation/Devaluation Events
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What is IP Valuation?
An estimation of the worth of an IP
asset or a set of IP assets
Many valuation techniques, rangingfrom the simple to the extremely
complex Patents exist even on patent valuation!
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Increased Need?
Greater need for IP Valuation
today than in the past?
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Increased US Patents/Litigation More Opportunities?
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More NPEs/Aggregators More Opportunities?
Source: PatentFreedom 2013. Data captured as of August 6, 2013
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Greater Availability of Information about IP
Various information sources make valuation
easier? Litigation Searching & Analyticse.g., Lex Machina,
DocketNavigator
Patent Analytics Online File Histories (Public Pair), Assignment Information, Fee
Status, Patent Families
Robust Patent Databases and Reporting (e.g., ThomsonInnovation)
International Patent Databases (e.g., EPO) Internet search engines
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Know Why You Need to Valuate
The objectives of the valuation will impact the
strategy as well as the type of valuation that isappropriate
What is the purpose of the valuation?
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Example Valuation Contexts
Negotiations to sell/license IP rights
Merger, acquisition, joint venture or bankruptcy
To support decision-making in patent disputes
Fund raising/loans/venture capital
Developing internal IP risk mitigation strategy
For accounting purposes
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Patent Valuation Methods
Generally, two categories of valuation:
quantitative and qualitative
Quantitative: focus on numerical andmeasurable data
Qualitative: focus on characteristics andpotential uses of the IP
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Quantitative Approach
Examples of quantitative methodologies:
(1) Income-based method
(2) Market-based method
(3) Cost-based method
(4) Option-based method
Overlap of methods
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(1) Income-Based Method
Value of IP asset = the sum of expected income
flows it will generate over time, discounted to thepresent day
Offensive analysis: What are projected future cash flowsfrom licensing or enforcement?
Defensive analysis: What are the savings (royaltypayments, litigation costs, design-around costs) due toowning the asset?
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(1) Median Damages Awarded for Patent Cases
2013 PWC Patent Study (available athttp://www.pwc.com/en_US/us/forensic-services/publications/assets/2013-patent-litigation-study.pdf )
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(1) Reported Royalty Rates by Industry
2012 KPMG report: Profitability and royalty rates across industries: Some preliminary evidence
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(1) Income-Based Method Simple Example
Company C is offered 100 patents for license, prior
to Owner offering for sale to third parties Due diligence on the patents suggests that there is risk of
infringement as to 5 patents
If Company doesnt acquire/license patents, what are the chances it
will be sued? (e.g., 80% chance of suit on a risky patent) Probability of loss? (e.g., 30%)
Targeted activity and est. exposure in case of loss (e.g., $10M)
Average Litigation costs? (e.g., $1M, win or lose)
RiskPatents
HitRate
ExpectedSuits
LossRate
Exposurein Loss
Avg. LitExpenses
Total
5 x 80% = 4 x ((30% x $10M) + $1M) = $16M
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(2) Market-Based Method
IP value is estimated based on similar market
transactions (e.g. similar license/acquisitionagreements) of comparable patent rights
Was it a similar transaction?
When did it occur? What technology area?
What was purpose of deal?, e.g., was acquisition for offensive or defensive purpose?
Who were the parties to the deal?
Were rights comparable?
Was agreement a license, cross-license or acquisition? Perpetual term?
Existing encumbrances?
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(2) Market Information Sources
The Internet
Press Releases
Company annual reports
Royalty rate publications
Court decisions
Unlike real estate transactions, the terms of most
IP transactions are kept confidential.
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(2) Recent Market Transaction Data
Date Seller Buyer Technology Type Deal Price No of IP Assets PerPatent/Asset
9/13 Nokia Microsoft MobilePhone 10-yrCross-License
1.65B Euro Nokias portfolio --
12/12 Kodak RPX/IV LedConsortium
Digitalimaging
Sale $527 Million ~1,110 patents $479K (perpatent)
4/12 Microsoft Facebook IM; Email;Browsing
Sale/License
$550 Million 650 patents, plus a licenseto 275 patents
$594K - $846K(per patent)
4/12 AOL Microsoft IM; Email;Browsing
Sale/License
$1.056Billion
~800 patents $1.32M(per patent)
8/11 MotorolaMobility
Google MobilePhone
Sale/Acquisition
$12.5 Billion Acquires Motorola Mobilityand its ~17000 patents
$735K perpatent)
6/11 Nortel RockstarConsortium(Apple,EMC,
Ericsson,Microsoft,RIM andSony)
MobilePhone
Sale $4.5 Billion ~6,000 patent assets $750K (perasset)
11/10 Novell CPTNConsortium
Networking/Software
Sale $450 Million ~882 patents $510K (perpatent)
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Low High
(2) Market Valuation Range Example
Kodak(12/2012)
Novell/CPTN
(11/2010)
Google/Motorola(8/2011)
Nortel(6/2011)
Facebook/Microsoft(4/2012)
Microsoft/AOL
(4/2012)
$479K perpatent
$510K perpatent
$735K perpatent
$750K perpatent
$594K to
$846K perpatent
$1.32M perpatent
$479K $1.32M
Which is most similar to the deal at hand?
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(3) Cost-Based Method
IP valuation based on the costs that were
expended in the development of the IP Two approaches:
Reproduction cost method: Based on costs associated
with the purchase or development of a replica of thepatent under valuation
Replacement cost method: Based on costs that would
be spent to obtain an equivalent patent asset withsimilar use or function
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(3) Cost-Based Method
Sources of costs:
Direct expenditures, such as costs with materials, laborand management, e.g., R&D, prosecution costs
Opportunity costs; costs due to delays in marketentrance; lost investment opportunities
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(4) Option-Based Method
IP valuation based on stock-option pricing models
More complex
Patent rights viewed as analogous to a call option
Both give a right to exploit an asset in the future, and toexclude others from using it
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Patent Valuation Methods
Generally, two categories of valuation:
quantitative and qualitative Quantitative: focus on numerical and
measurable data
Quali tat ive: focus on character is t ics andpo tential uses of the IP
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Qualitative Approach
Valuation performed through the analysis of
aspects that can impact the value of an IP asset,e.g., legal aspects, technology level of theinnovation, market details, company organization
Not based on purely financial analytical data
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Qualitative Considerations
Incremental improvement?
Relevant market?
Who developed the IP?
How close to expiration?
Are continuations pending? Subject to broadening reissue?
Nature of the claims? Method? System?
File Historyclean? Forward Citations
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Valuation/Devaluation Events
Judicial/Legislative Events Possible Effect
ObviousnessKSR -Algorithm RuleAristocrat -
Divided InfringementAkamai/Limelight(CAFC) +
VenueTS Tech/Volkswagen -
Willful InfringementSeagate -
Injunctive ReliefeBay -
Injunctive Relief for NPEs at ITC +
Entire Market Value Rule DamagesLucent -
IPR/Prost-Grant Review -
Inequitable Conduct Heightened RequirementsStar Scientific/Therasense
+
Legislative Patent Reform +/-
Patentable Subject MatterCLS Bank/Alice ?
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THANK YOU! ANY QUESTIONS?
John T. [email protected]
Michael F. [email protected]
Fish & Richardson P.C.601 Lexington Avenue 52 Floor
New York, NY 10022
mailto:[email protected]:[email protected]:[email protected]:[email protected]